“INTERNATIONAL LIQUIDITY, MONETARY SPILLOVERS AND ASSET PRICES” Daniel Borja & Daniel Goyeau.
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Transcript of “INTERNATIONAL LIQUIDITY, MONETARY SPILLOVERS AND ASSET PRICES” Daniel Borja & Daniel Goyeau.
“INTERNATIONAL LIQUIDITY, MONETARY SPILLOVERS AND
ASSET PRICES”
Daniel Borja
&
Daniel Goyeau
Summary
• International Liquidity Asset Prices– U.S., Euro Area & ASEAN 5– Quarterly Data: 1995 to 2005
• Liquidity Definition
• U.S. Reciprocal Effects Euro Area
• ASEAN 5: No Spillover Effect
Presentation Structure
• Introduction
• Liquidity Definition
• Methodology
• Results and Findings
• Conclusion
Liquidity and Asset Prices
• Tenuous Link?
Effect of Financial Globalization
Greater Synchronization of Markets
Monetary Spillover
What is Liquidity?
• Two Concepts of Liquidity, Baks and Kramer (1999)– Market Liquidity– Monetary Liquidity
• Money growth• Excess money growth
What is Liquidity?
• Various Measures of Excess Liquidity, ECB (2001)– Nominal money gap and real money gap– Monetary overhang/shortfall
• Based on Quantity Theory of Money, Gouteron, et al (2005)– M + V = P + Y
What is Liquidity?
• International Liquidity Ratio, Filho (2002)– The ratio of the net foreign reserves against
the net foreign interest-bearing debt– Crucial liquidity ratio
• International Liquidity, Caballero, et al.(2000 & 2001)– Collateral– Precautionary Reserves– Liquidity-based model of domestic interest
rate determination
What is Liquidity?
• Macro and Micro-based Measures, Fernandez (1999)– Aggregate measures
• Excess liquidity: monetary aggregate growth• Credit available• Degree of Leverage
– Micro-based• Depth• Breadth• Resiliency
Liquidity Definition
• Problems with micro-based measures
• Problems with “asset-debt” ratio
• International Liquidity: EXCESS MONEY GROWTH
Liquidity and Asset Prices
Excess Liquidity
| Increases Demand for a Fixed Supply of
Assets
|Asset Price Inflation
*Baks and Kramer (1999)
Liquidity and Asset Prices
Improving Economic Prospects
Excess Liquidity Asset Price Inflation
*Baks and Kramer (1999)
Liquidity and Asset Prices
Excess Liquidity
|Decrease in the Discount Rate
|Asset Price Inflation
*Baks and Kramer (1999)
International Liquidity Channels
Push Channel
Excess Liquidity Seek Out Foreign Markets
Foreign Asset Price Inflation
Pull Channel
Excess Liquidity
Attract Foreign Capital
Depress Foreign Asset Price
Dataset
• U.S., Euro Area and ASEAN 5 (Indonesia, Malaysia, Philippines, Singapore and Thailand)
• Quarterly Data: 1995 to 2005
• M1, M3, real and nominal GDP, short-term interest rates, share price indices, consumer price indices and exchange rates
Data
• Growth rates
• Local currency into USD or euros
• ASEAN 5 DATA– Simple Sum– Weighted Growth Series
Data
• Excess Money Growth– Quarterly money growth minus quarterly
growth rate of nominal GDP
• Real Returns– Share price returns/short-term interest rate
minus consumer price inflation
Money Growth Rates
M1US
M1Euro
M1ASEAN
sum
M1ASEAN
wt
Mean 0.51% 2.14% 1.38% 1.89%
Median 0.49% 1.33% 2.31% 2.17%
Max. 5% 10.25% 16.42% 19%
Min. -3.93% -5.92% -18.43% -18.65%
Std. Dev. 1.79% 3.77% 6.29% 6.82%
Excess Money Growth Rates
Excess M1
USExcess M1
EuroExcess M1ASEANsum
Excess M1ASEANwt
Mean -0.77% 1% 0.30% 0.40%
Median -0.53% 2.15% 0.39% -0.15%
Max. 8.04% 14.76% 14.25% 16.37%
Min. -6.28% -14.99% -13.72% -12.04%
Std. Dev. 2.89 6.43% 5.09% 4.94%
Money Growth Rates
• Correlated: ASEAN 5 simple sum and weighted growth rates series
• Money growth rates for ASEAN are more volatile
• Excess money growth rates for Euro area are more volatile
First Regression Form
R i, t = c + A(L)mi, t + B(L)mj, t
+ C(L)m k, t + D(L)v i, t + ε i, t
where:
R i, t = real stock return
m = money growth of markets i, j and k
v i, t = velocity of money
Velocity of Money
• Ratio of nominal GDP and broad money(M3)
• Significant change in money velocity in the three areas during this period
Monetary Spillover Regression
R i, t = c + aRi, t-1 + B(L)xmi, t + C(L)ri, t + D(L)yi, t
+ E(L)pi, t + F(L)vi, t + G(L)xmj, t + H(L)xmk, t + ε i, t
where:
R i, t = real stock return
xmi, t = excess money growth
ri, t = real short-term rate
yi, t = real gdp growth (USD)
pi, t = inflation rate
vi, t = velocity of money
Results
• Results using narrow money are more robust than the regression results using broad money
• Regressions for the ASEAN 5 using a weighted series and simple summations gave similar results
US Real Market Return
• Money growths of the three markets are not statistically significant
Variable Coeff. t-Stat.
Constant -0.334 -1.953
US M1 growth
-0.006 -0.007
ASEAN M1 growth
0.262 1.244
Euro area M1 growth
0.039 0.165
Velocity 0.245 2.092
R2 0.147
ADJ. R2 0.044
Euro Area Real Market Return
• Euro area money growth is significant
Variable Coeff. t-Stat.
Constant 0.185 0.414
US M1 growth
0.456 0.789
ASEAN M1 growth
0.573 1.602
Euro area M1 growth
2.475 3.155
Velocity -0.202 -0.594
R2 0.540
ADJ. R2 0.448
ASEAN 5 Real Market Return
• ASEAN 5 money growth is significant
Variable Coeff. t-Stat.
Constant 0.388 1.119
US M1 growth
-1.887 -1.270
ASEAN M1 growth
2.362 6.041
Euro area M1 growth
0.119 0.278
Velocity -0.379 -1.244
R2 0.566
ADJ. R2 0.514
US Real Market Return
Variable Coeff. t-Stat.
Constant -0.452 -1.868
Mkt. Ret.(-1) 0.062 0.336
US XCS M1 0.238 0.381
Real GDP 0.047 0.139
CPI -9.310 -2.372
Velocity 0.376 2.051
Real ST rate -1.069 -0.837
Euro XCS M1 -0.203 -0.596
Euro XCS M1(-1) -0.038 -0.084
Euro XCS M1(-2) 0.894 2.430
ASEAN XCS M1 0.365 1.217
ASEAN XCS M1(-1) 0.497 1.672
ASEAN XCS M1(-2) -0.148 -0.509
R2 0.639
ADJ. R2 0.442
•Inflation is statistically significant
•Money velocity remains significant
•Evidence of a push channel from Euro area to the US
Euro Area Real Market Return
Variable Coeff. t-Stat.
Constant -0.178 -0.256
Mkt. Ret.(-1) 0.327 0.902
Euro XCS M1 4.450 2.806
Real GDP 4.413 2.643
CPI 0.525 0.072
Velocity 0.076 0.130
Real ST rate -0.678 -0.126
US XCS M1 -0.001 -0.001
US XCS M1(-1) 2.000 1.934
US XCS M1(-2) -0.876 -0.679
ASEAN XCS M1 0.858 1.036
ASEAN XCS M1(-1) 0.160 0.155
ASEAN XCS M1(-2) 0.246 0.355
R2 0.716
ADJ. R2 0.407
•Real GDP growth and Euro area excess M1 growth are statistically significant
•Spillover: Push of money from US to the Euro area
ASEAN 5 Real Market Return
Variable Coeff. t-Stat.
Constant 0.441 0.855
Mkt. Ret.(-1) -0.300 -1.992
Asean XCS M1 2.775 3.449
Real GDP 2.411 3.030
CPI 2.561 0.706
Velocity -0.431 -0.970
Real ST rate 0.968 0.840
US XCS M1 -0.502 -0.377
US XCS M1(-1) 1.226 0.852
US XCS M1(-2) 0.181 0.143
Euro XCS M1 -0.239 -0.260
Euro XCS M1(-1) -0.924 -0.882
Euro XCS M1(-2) 0.117 0.132
R2 0.653
ADJ. R2 0.464
•Real GDP growth and ASEAN 5 excess M1 growth are statistically significant
Findings
• Liquidity Spillovers: US and Euro area– Same economic standing ≈same monetary
policies
• ASEAN 5: autonomous from excess international liquidity– Emerging Market
• US domestic excess liquidity insignificant
Conclusion
• Local excess liquidity– Euro and ASEAN 5 : consistent with
expectations– US market: why?
• Spillover effects– Euro area and US market: reciprocal effects– ASEAN 5: no spillover effect
END OF PRESENTATION